Financing contract design under information asymmetry in production and logistics: Separated financing or integrated financing

Information asymmetry arising from firms’ non-contractible actions hinders financial institutions from offering more favorable loan terms. This paper analyzes the inefficiency caused by this information asymmetry under separated financing, and examines how integrated financing addresses this issue. We develop a game-theoretic model to analyze the strategic interaction between a financial institution (FI) and a capital-constrained manufacturer facing a non-contractible operation type choice with respect to production and logistics. In separated financing, the FI raises the interest rate to hedge against potential losses from the manufacturer’s deviation in operation type. This results in underproduction and profit loss for the manufacturer. However, in integrated financing, the FI leverages its greater pricing flexibility to offer an integrated financing contract, which reduces the manufacturer’s deviation incentive. This strategy mitigates information asymmetry, thereby restoring the manufacturer’s production quantity and profit to levels under full information. We further explore the impacts of several factors including salvage value and the FI’s risk aversion. Our study sheds light on the value of integrated financing in mitigating information asymmetry and improving manufacturer performance.